IMF urges Russia to reduce stimulus after recovery

The IMF has urged Russia to start reforming public spending and tightening monetary policy this year, after the country boosted growth rates to 9%.

The fund says Russia should not only consolidate its finances following its recovery, but also undertake long-stalled public-sector reforms, including to pensions, healthcare and social protection.

In a country report published today, the IMF says consolidation should begin in 2010 and gather pace in 2011–12.

In terms of financial sector policies, the Russian government should introduce improved provisioning standards, which are needed to reduce risks to bank balance sheets.

In addition, the IMF says the Bank of Russia (CBR) should have its responsibilities enhanced and conduct consolidated supervision. This would include, for example, over connected lending. (article continues below)

Russia’s government should also focus on inflation control in the context of a flexible exchange rate. The IMF welcomes Russia’s recent greater exchange rate flexibility, but says “political resolve in this regard remains to be tested” in an environment, with a greater trade-off between inflation and currency appreciation.

“The key policy challenge facing the authorities will be to withdraw the large fiscal stimulus as cyclical conditions normalize”

Currently, Russia’s exchange rate system is classified as an “other managed arrangement” and is free of restrictions on payments and transfers for current international transactions.

Despite the IMF’s talk of consolidation, the recession has scarred Russia’s economy. Some IMF directors dissented with the fund’s majority perspective and cautioned against removing stimulus too early in Russia’s recovery.

Inflation rates have come down but the banking system is still under strain and credit is likely to recover only gradually.

“With Russia likely to emerge from the crisis with lower potential growth, the key policy challenge facing the authorities will be to withdraw the large fiscal stimulus as cyclical conditions normalize to avoid a renewed bout of rapid real appreciation and high inflation,” the IMF says.